Transfer schemes—breaking new ground?

According to Joe Bannister, partner at Hogan Lovells, the major lesson from Copenhagen Re is the importance the courts continue to place upon the quality of supporting evidence and levels of disclosure when considering both transfer schemes (also known as part VII schemes or insurance business transfer schemes) and schemes of arrangement under Part 26 of the Companies Act 2006 (CA 2006).

Original news

Re The Copenhagen Reinsurance Company (UK) Ltd and another [2016] EWHC 944 (Ch), [2016] All ER (D) 25 (May)

Transfer of long-term insurance business. The Companies Court granted an order, among other things, sanctioning an insurance business transfer scheme to transfer the applicant company, The Copenhagen Reinsurance Company (UK) Ltd’s entire insurance business to another company in the Enstar group.

What are the key things to take from this case?

This was an application to the court to sanction a scheme for the transfer of insurance business (transfer scheme) pursuant to Part VII of the Financial Services and Markets Act 2000 (FSMA 2000). In the main, Snowden J’s ruling is a restatement of the well-recognised grounds upon which the court will exercise its discretion to sanction a transfer scheme. The ruling nevertheless goes further, in that it is the first occasion where the court has had to consider how to deal with the effect of a transfer scheme upon guarantees given by the transferor’s parent company in respect of policies written through the Institute of London Underwriters (ILU). Snowden J held that he had the power under FSMA 2000, s 112(1)(d) to modify the guarantees given to the ILU by Copenhagen Re’s parent. The effect of the modification was that the original guarantee remained in place but on terms that the guaranteed obligations were modified by the court to become those of the transferee under the scheme, Marlon Insurance Company Limited (Marlon).

How did the issues arise?

The case arose out of a transfer scheme to transfer the entire insurance business of Copenhagen Re to Marlon. Copenhagen Re was in run-off and had ceased writing new business in December 2000. Copenhagen Re was a wholly-owned subsidiary of Marlon and both were members of the Enstar Group. Enstar’s business model is to acquire and manage insurance and reinsurance businesses in run-off. The transfer scheme provided for the transfer of Copenhagen Re’s entire insurance business to Marlon.

A transfer scheme, when proposed, must be publicised to the policyholders it affects. FSMA 2000, Pt VII also lays down a number of additional safeguards for the policyholders whose business is being transferred. In this case, the scheme transferred the business and policies of Copenhagen Re to Marlon. The safeguards include the appointment of a suitably qualified independent expert, approved by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) as regulators. In addition, the court must sanction the transfer scheme before it can become effective. The hearing before Snowden J was the sanction hearing.

Copenhagen Re also asked the court, pursuant to FSMA 2000, s 112(1)(d) to approve a similar amendment to a trust that had been established to support Copenhagen Re’s obligations to certain US policy holders. The court was asked to amend the trust so that it applied in favour of Marlon policyholders. Finally, the court was asked to order the dissolution of Copenhagen Re, with that dissolution to take effect after the scheme had been effective and following the transfer of Copenhagen Re’s assets to Marlon.

What were the legal issues the court had to decide?

Copenhagen Re had written business through the ILU. The ILU is an association of insurers offering marine and aviation insurance in the London insurance market. The ILU provides members with a central accounting and settlement system. The ILU requires a parent company guarantee as a pre-condition to allowing members to write policies through the ILU. Copenhagen Re’s original shareholders had provided such guarantees prior to Copenhagen Re’s transfer to Enstar. Those guarantees had remained in place and they were not specifically dealt with under the transfer scheme. The original guarantors rejected the proposal but in sanctioning the scheme, the court modified the guarantee so that they applied to Copenhagen Re’s business following its transfer to Marlon.

What were the main legal arguments put forward?

ILU guarantees

Copenhagen Re argued that the proposal to modify the ILU guarantees and apply them to Marlon was no different to the way in which a FSMA 2000, Pt VII scheme usually transfers reinsurance. Snowden J did not accept this. He also rejected the guarantors’ submission that Enstar should become the replacement guarantor. Snowden J held that FSMA 2000, s 112(1)(d) was a widely drafted provision, giving the court extensive powers to facilitate the implementation of the scheme that it had sanctioned. In Snowden J’s view, the proposed scheme could only be ‘fully and effectively carried out’ if the guarantees remained in place as obligations of Copenhagen Re’s original shareholders to support Marlon’s assumption of liability under Copenhagen Re’s policies.

Snowden J applied the same reasoning to hold that the Copenhagen Re trust should also apply to Marlon’s business. Snowden J reached that conclusion in part through relying on evidence that the trustee would in any event have consented to the trust’s application to Marlon.

Finally, Snowden J concluded that it would be appropriate for Copenhagen Re to be dissolved without liquidation once the transfer of Copenhagen Re’s business to Marlon had been completed.

To what extent does this judgment clarify or extend the law in relation to transfer schemes (eg, relating to third party guarantees)?

The actual decision to sanction the Copenhagen Re transfer scheme is not new law. In sanctioning the transfer of Copenhagen Re’s business to Marlon, Snowden J applied the well-trodden principle that a FSMA 2000, Pt VII transfer scheme did not have to be the best or indeed the only scheme available to Copenhagen and Marlon. It was only necessary to show that the scheme as a whole was fair as between the interests of the different classes of policyholder. Snowden J ruled that the transfer scheme met that test.

In reaching that view, Snowden J drew comfort from the independent expert’s conclusion that the scheme did not adversely affect the claims handling service and costs of claims of administration which Copenhagen Re policyholders would respectively face and receive. Snowden J also relied upon the expert’s ‘clear conclusion’ that neither the transferring policy holders of Copenhagen Re nor Marlon’s current policy holders would be adversely affected by the scheme on account of having to rely on Marlon’s covenant to pay as against the covenant to pay of Copenhagen Re.

Snowden J’s decision to modify both the guarantee and the trust in the manner summarised above are the most novel aspects of his judgment. Although pragmatic, Snowden J’s approach is also consistent with the line he has taken towards schemes of arrangement under CA 2006, Pt 26. It is clear from the judgment that Snowden J laid great weight upon the quality of the evidence and the support for the transfer scheme shown by the PRA and Copenhagen Re’s trustee.

What practical lessons arise?

The major lesson is the importance the courts continue to place upon the quality of supporting evidence and levels of disclosure when considering both transfer schemes and schemes of arrangement under CA 2006, Pt 26. In the earlier case of Re Indah Kiat International Finance Company BV [2016] EWHC 246 (Ch), [2016] All ER (D) 144 (Feb), Snowden J adjourned a convening hearing for a scheme of arrangement under CA 2006, Pt 26 on the basis that he was not satisfied with the quality of the supporting evidence and levels of disclosure. That adjournment, like the approval of the guarantee modification in the Copenhagen Re transfer scheme showed pragmatism, in that Snowden J did not, as he might have done, reject the Indah Kiat convening application out of hand.

It is true that a scheme of arrangement under CA 2006, Pt 26 is a very different animal to an insurance business transfer scheme under FSMA 2000, Part VII. Nevertheless, in their focus upon the need for well-reasoned evidence and full disclosure, these two different rulings are consistent in their approach and outcome.

Joe Bannister is a seasoned international, restructuring and insolvency lawyer. For nearly 30 years, Joe has helped the entire range of restructuring stakeholders to address and resolve the most difficult restructurings and insolvencies. He has experience across all industry sectors, ranging from manufacturing and transportation to the services sector and he has dealt with cases in the UK, Europe, Asia and the US. Joe’s work also includes a number of reorganisations or bankruptcies in the financial institutions sector, especially insurers and banks. His international assignments have encompassed a number of offshore jurisdictions, including Bermuda, the BVI, Cayman Islands and the Isle of Man.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

If you are a LexisPSL subscriber, click the links below for further information:

Insurance business transfer schemes

Schemes of arrangement—process and statutory framework

Not a subscriber? Find out more about how LexisPSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency.

First published on LexisPSL Restructuring and Insolvency

 

Relevant Articles
Area of Interest